“Sometimes I wonder if GDP stands for Gross Domestic Product or Grossly Distorted Procedures.”
that’s Mish talking about hedonic adjustment of GDP
hedonic adjustments account for increasing quality / technology over time and they are applied to both CPI and GDP
say you buy a laptop computer today – it has a 3 GHz CPU instead of the 2 GHz CPU on last year’s model
today’s laptop cost MORE than last year’s model BUT for CPI purposes we adjust the price of today’s laptop down to account for the increase in technology – the result: inflation is reported as declining because today’s hedonically adjusted laptop costs less than last year – that’s right, the laptop costs less this year even though you have to take more money out of your pocket to buy it!
and the games aren’t over yet – we want to pump GDP as high as possible so for GDP purposes we will adjust the cost of the laptop UP to account for the increased technology it represents – that’s right, for GDP purposes the laptop is worth MORE than you paid for it because of its advanced technology
confused yet? let’s recap:
– we finagled the cost of the laptop down when calculating CPI because we want inflation to look tame
– we finagled the cost of the laptop up when calculating GDP because we want the country’s economy to look strong and healthy
fun with numbers!!!
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another fun adjustment our government makes for CPI purposes is called ‘substitution’
the idea is that as costs increase the consumer will substitute less expensive items for more expensive ones
as steak becomes too expensive for grandma she will switch to hamburger – when hamburger becomes too expensive she will switch to dog food – BUT NO INFLATION HAS OCCURRED in either steaks or hamburger – they have just been removed from the basket of goods used to measure CPI
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any number published by the govt these days is suspect IMO – and to base any ‘green shoots’ on the govt’s manipulated numbers is laughable
at a minimum you have to understand the method in which the govt number is calculated – far easier to let John Williams do the research and just use his numbers in place of the govt’s numbers – check out www. shadowstats.com
